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RealNetworks, Inc., et al. v. DVD Copy Control Association, Inc., et al.

In a declaratory relief action filed by RealNetworks relating to its proposed sale of software with DVD-copying capabilities, the court imposed monetary sanctions against RealNetworks for spoliation of evidence and denied RealNetworks' motion to dismiss the studio defendants’ counter-claim for breach of implied covenant of good faith and fair dealing

RealNetworks’ product (RealDVD) allegedly allows a user to make a digital copy of encrypted DVDs. Defendant DVD Copy Control Association (DVD CCA) consists of companies in the motion picture, consumer electronics and computer industries. It licenses encryption technology called Content Scramble System (CSS) technology to manufacturers of devices and software pursuant to a standard license agreement, with certain restrictions.

On August 13, 2007, DVD CCA licensed its CSS technology to plaintiffs pursuant to a CSS license agreement. Under this license, plaintiffs obtained the CSS technology with authorization to build a product to play DVDs. In early September, 2008, shortly before the release of the RealDVD software, DVD CCA and the studio defendants advised plaintiffs that they were in violation of the CSS licensing agreement because the RealDVD software allows digital-to-digital copying of DVD content using a personal computer.

On September 30, 2008, plaintiffs filed a declaratory action in the Northern District of California seeking a declaratory judgment that, in marketing and selling its RealDVD product, plaintiffs did not breach the CSS license agreement and did not violate the anti-circumvention provisions of the DMCA. That same day, plaintiffs released and made the RealDVD product available for download. Also that day, some of the studio defendants filed an action in the Central District of California, alleging that RealDVD did, in fact, breach the CSS license agreement and violate the anti-circumvention measures of the DMCA. On October 14, 2008, that suit was formally transferred to the Northern District of California, and shortly thereafter related to plaintiff’s declaratory judgment action. Following an October 3, 2008, hearing, the court issued defendants’ requested temporary restraining order to restrain and enjoin plaintiffs from further distribution of the RealDVD product.

Several months later, after conducting discovery for a preliminary injunction proceeding, defendants moved for sanctions against plaintiffs for spoliation of evidence. The court held that plaintiffs knew in early September, 2008, that litigation was likely and had a duty to preserve documents and evidence at that time. Defendants claimed, among other things, that plaintiffs failed to produce several notebooks used by a senior program manager that were believed to contain information about the development of the RealDVD product.

The court found no willful destruction of documents although it did conclude that plaintiffs failed to preserve the notebooks when it knew there was probable litigation relating to the content of those documents. The court rejected defendants’ motion to draw an adverse inference against plaintiffs, to exclude testimony proffered by plaintiffs, or to dismiss plaintiffs’ claims based on failure to preserve evidence, but the court did grant defendants’ motion for monetary sanctions against plaintiffs for failing to preserve evidence.

Regarding plaintiffs’ motion to dismiss defendants’ counter-claim for breach of implied covenant of good faith and fair dealing, the court held that defendants adequately pled that there was a contract (the CSS licensing agreement), “that its purpose was to prevent unauthorized copying of DVD content, and that plaintiffs, through the use of its product allowing copying of DVDs to hard drives, allegedly breache[d] the implied covenant of good faith and fair dealing.”